AIB Preliminary 2009 Results

AIB’s preliminary results for 2009 are here. There’s some new NAMA-related information but not much. The bank is transferring loans with previous book value of €23.2 billion to NAMA, down from earlier estimates of €24.1 billion. The provisions of €4.2 billion against these loans, corresponding to an 18 percent writedown, are presumably a holding operation until the actual transfer involving a larger writedown.

In relation to stories about AIB shrinking credit, I heard references on the radio this morning to the bank shrinking its loans to customers from €129.5 billion in 2008 to €103 billion in 2009. This is only correct if one accepts the accounting treatment of the €19 billion the banks expect to receive from NAMA as “financial assets held for sale to NAMA” rather than “dodgy property-related loans that have been written down a bit.” I’m sure the bank is restricting lending but it’s not as easy to get loan books down as fast as the “loans to customers” line suggests.

40 thoughts on “AIB Preliminary 2009 Results”

  1. For me a major problem is the proposal to engage in asset sales to try to gain capital. The only assets that could raise any decent sums are the very ones that are profitable.
    We would have the bizarre sight of a company selling the profitable assets to prop up the unprofitable ones.
    This might bring the capital base closer to the minima, and would, euro for euro, reduce the amount the state would have to put in. Thus, the consequence may well be a weaker, zombified bank with greater private stakes than optimal. To try to dezombify they would have to restore the unprofitable parts (the ROI operations) to profit; this would to some extent hamper any recovery (higher charges, less risktaking on projects, greater restrictions on credit than would be optimal etc), and thus would perpetuate the japanification of the system. What is most worrying is that last night a senior banker told me quite categorically that there was nothing wrong with the banking system that a decade of quite recuperation wouldn’t solve, there was no need to namafy or anything else. Given the evidence to date its clear that the domestic bankers are to a great extent driving the banking rescue, and as such we should be worried by statements such as that.

  2. It’s a pity AIB don’t indicate what portion of Interest Income relates to assumed income (i.e. in the past other Irish banks have included arrears interest and roll-up interest as part of their Interest Income). Did I miss it?

    On page 46, this note appears: “Interest income in 2009 includes a credit of EUR597 million (2008: a charge of EUR69 million) removed from equity in respect of cashflow hedges.” I can’t say I know what this means. Anyone know?

  3. Does it make sense to have provisions of just 18% on the NAMA bound loans when the bank is expecting the losses to be 30% plus.

  4. How how does NAMA expect an 80% repayment rate on loans when 47% are currently impaired, 12% are vulnerable, 12% on watch and only 29% are okish?

    With only 0.1% of loans in Grades 1-3. What happened to all those good loans we were meant to be getting?

  5. Tis like an alcoholic pre intervention.
    “I will sell the children!”
    The corporate psychology is amazing,
    Why do the politicans buy it too?
    Al

  6. @Ahura
    It makes sense if that is all you can get away with at this stage. Think of the boiling a frog analogy. 18% now, 15% next year….and that all assumes that there is no more defaultable loan stock there. Which brings us to your next posting…
    They cant. Its hogwash.

  7. @Brian Lucey,

    Your first post calls to mind a classic joke from ’70s Russia. Lenin, Stalin and Brezhnev are riding in a train across Siberia. The train suddenly stops in the middle of nowhere. Lenin wants to get out and give the engineer a good ideolological dose of Marxist-Leninism; Stalin wants to get out and shoot the engineer. Brezhnev restrains them both and says: “Let’s pull down the blinds and pretend we’re still moving.”

    Time to batten down the hatches and export the serfs. 1950s Ireland anyone?

  8. @Brian Lucey,

    I think you were replying to Dreaded_Estate. Feel free to have a pop at answering my EUR597 million question? or the general interest income query.

  9. Erm, these are not results, these are a presentation of results. I haven’t seen any pro-formas – am I missing a link?

  10. @Brian Lucey – “nothing wrong with the banking system that a decade of quite recuperation wouldn’t solve”

    There’s clearly a lot going on in the next 10 years that we ordinary people don’t know about. I just looked at the IT website and it states quite categorically there that IDA is going to create 105,000 jobs by 2014 and there’s also a report from Fás and the ESRI today that says 250,000 jobs will be created by 2015.

    Here are the links:

    http://www.irishtimes.com/newspaper/breaking/2010/0302/breaking63.html

    http://www.irishtimes.com/newspaper/breaking/2010/0302/breaking40.html

    Er, though I’m not quite sure what Chief Executive Barry O’Leary meant when he said it was the first time the authority had published its strategy in this way……….. and withheld some of the details……
    Clearly, not publishing is the new publishing.

    Probably just minor details like exactly how they are going to achieve that.

    Get with the programme Brian. This banker chappie obviously knows a lot more than he’s letting on to you.

    The worst is behind us. We are on the road to recovery. “Yee-hah” as my Texan friends would say.

    Oh dear. I just read some more from the IT website and it appears tax revenue has fallen by another billion. Never mind, we can always borrow it.

  11. I think Karl has previously mentioned the need for an orderly resolution process to be put into law, that would allow for orderly bank failures. McWilliams has also suggested selling off the profitable parts to foreign banks and bankrupting the rest.

    The news seems to be giving these suggestions more and more legs. Just as in Iceland, the taxpayer is asking why do I have to bailout the local bankrupts.

  12. We cant have a failure until we decouple the banks from the sovereign. And apparently we cant decouple as that would lead to failure.

  13. @Brian

    1. “For me a major problem is the proposal to engage in asset sales to try to gain capital. The only assets that could raise any decent sums are the very ones that are profitable.”

    That was Denis’s problem with INM…

    2. “We would have the bizarre sight of a company selling the profitable assets to prop up the unprofitable ones.”

    But isn’t that what the EC will force them to do? Brussels is calling the shots here, right?

  14. Sarah
    1 – yep.
    2- well….maybe. I think the political game here is – sell something to make it look as though the state/taxpayer is not port of first call. The issue is staging. Too early a call on the state = taxpayer resentment for bailing the feckers out again. Too later = taxpayer resentment for not having been asked to bail the feckers out, now look at them, like a fiscal George Romero festival.

  15. 😳 Sorry, I was looking at the wrong “document” (what kind of obfusticator names all their documents with the same name? Apart from Aussie philosophy departments…).

    @Ahura
    “On page 46, this note appears: “Interest income in 2009 includes a credit of EUR597 million (2008: a charge of EUR69 million) removed from equity in respect of cashflow hedges.” I can’t say I know what this means. Anyone know?”
    Sounds like IAS39 to me… http://www.iasplus.com/standard/ias39.htm

    This, I think, is a better example: http://www.hmrc.gov.uk/manuals/cfmmanual/cfm16305a.htm

    So what it says to me is that a set of derivatives, defined as cashflow hedges according to ias39, have moved from having a negative value of 69 mn to having a negative value of 597 mn? (I am presuming a negative value because they have been removed from equity, rather than added, but the use of ‘credit’ in the previous sentence is somewhat alluring…).

    Sorry, I haven’t been any help at all there!

  16. @Brian Lucey, Does your point 2 above not presume that either the banks, or the government, are masters of the banks destiny?

  17. @Brian Lucey – “nothing wrong with the banking system that a decade of quite recuperation wouldn’t solve”

    There’s clearly a lot going on in the next 10 years that we ordinary people don’t know about. I just looked at the IT website and it states quite categorically there that IDA is going to create 105,000 jobs by 2014 and there’s also a report from Fás and the ESRI today that says 250,000 jobs will be created by 2015.

    links currently being ‘moderated’

    Er, though I’m not quite sure what Chief Executive Barry O’Leary meant when he said it was the first time the authority had published its strategy in this way……….. and withheld some of the details……
    Clearly, not publishing is the new publishing.

    Probably just minor details like exactly how they are going to achieve that.

    Get with the programme Brian. This banker chappie obviously knows a lot more than he’s letting on to you.

    The worst is behind us. We are on the road to recovery. “Yee-hah” as my Texan friends would say.

    Oh dear. I just read some more from the IT website and it appears tax revenue has fallen by another billion. Never mind, we can always borrow it.

  18. @Joseph
    What is remarkable is how little outrage is being expressed in civic society about what has happened and is planned to happen. Irish civic society in the 2010s is actually much more tolerant of establishment failure than in the 1950s.

    In the 1950s there was the then traditional economic stagnation but the public finances were stable as was the banking system. Our current establishment’s failure is on a gigantically greater scale: the COLLAPSE of the economy AND the national finances AND the banking system. In the 1950s our current government would have been summarily run out of office if they had done this. Whereas 60 years later, in the second decade of the twenty first century, the papers are full of discussion about whether Brian Cowen can take his “last chance” to “transform” the government through a “radical” reshuffle. Cowen’s government has already transformed the country – DISASTROUSLY. For one of Western Europe’s most stable durable democracies to be even debating his last chance is a terrible indictment of Ireland. Weren’t the bank guarantee and NAMA enough dramatic Cowen transformation? People want him to go further? Dear God.

    In Ireland we endlessly congratulate ourselves on how much more advanced we are than in the 1950s. In many ways yes but the evidence in relation to establishment performance doesn’t support this. The political classes, the unions, the media, civic society even the population generally actually have hugely LOWER standards for government than their equivalents in the 1950s.

  19. @Ahura Mazda
    Scratch that post that hasn’t been approved yet, have a look at p.40 of the results – the sideways one. It appears that 538 mn has been added to equity as a result of cash flow revaluations? (Basically a reverse of last year’s position).

  20. @ Oliver Vandt,

    Just on a aside note about the patience of the Irish. Even during the Famine years, when people were starving in their thousands the Irish were a very patient bunch. This was even commented upon by several London newspapers at the time.

    It’s just one of our qualities I suppose.

  21. @Sporthog
    If what had happened in the last three years had happened in Ireland between 1950 and 1953 the government would have been run out of office.
    Simultaneous: Economic collapse; Budgetary collapse; Banking collapse.
    The scale of the destruction is only comparable to losing a war. The reaction of our establishment is to brazenly boast about the tough decisions they are making as they transfer public wealth to developers and bank investors and protect the insiders who fund, support, rule and exploit with them. If they had any sense of shame they would have left office long ago. That they see no reason to do so shows the utter contempt they have for the people they rule. That civic society has not forced them out shows how incredibly low our standards for governance are. It’s a national shame.

  22. So AIB are dumping 63% of impaired loans into NAMA while booking a haircut of 18%, but I thought I read recently that a 31m site had dropped in value by 98% so this set of accounts could be right up there with Alice in Wonderland?

    @ Sporthog

    “It’s just one of our qualities I suppose”

    The words sheep and lambs come to mind.
    Is it really a quality or a massive flaw in our national psyche? There was plenty of food around during famine times, as a matter of fact period houses were being constructed in Dublin even as the famine raged! My own house was completed in 1851 and took two years to build. Just as then, people are feathering their nest thanks to the largesse of Mr. Lenihans.

    When behaviour becomes massively dysfunctional, counterproductive and when the populace enable incompetence and promote people who have brought ruin on the country things can only go from bad to worse.

    @ Oliver Vandt
    Your analogy to losing a war is a good one. But having lost the war our government then decide to unleash a fiscal war on its own people. AIB have waged war on its own shareholders.

    The self delusion of our minister is staggering, even boasting of being available to offer advice to Greece.

  23. @ yoganmahew

    You are correct that this is IAS39.

    The relevant note in AIB’s 2008 accounts is “22 Derivatives and hedge accounting”

    Cash flow hedge accounting

    “The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is initially recognised directly in shareholders’ equity, and recycled to the income statement in the periods when the hedged item will affect profit or loss. Any ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement immediately.

    When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time, remains in equity and is recognised in the income statement when the forecast transaction arises. When a forecast transaction is no longer expected to occur , the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.”

    AIB are taking a €597,000,000 credit to interest income on the basis of “Cash Flow Hedging”.

    NAMA is about to undertake €14.6bn (notional value) of derivatives contracts.

    Page 9 http://www.irishtimes.com/focus/2009/namaplan/index.pdf

    I’m sure I’m way off the mark here but €0.6bn added to “Interest Income” from “Equity” seems like a lot of money.

    If AIB are taking a €0.6bn gain on derivatives are we, with the transfer of derivative contracts, about to take a €0.6bn loss.

    No, that can’t be right. It must be that AIB are so good at playing in the derivative casino that they are not in fact a bank but a hedge fund.

    When a forecast transaction is no longer expected to occur

    NAMA is the only reason I can see for that.

  24. @ Sporthog

    “Just on a aside note about the patience of the Irish. Even during the Famine years, when people were starving in their thousands the Irish were a very patient bunch. This was even commented upon by several London newspapers at the time.”

    Monoculture potatoes then.

    Monoculture banks now.

    And as the people are now starved of credit no doubt Brian Cowen and John Gormley will be seen pooping up at various credit soup kitchens as long as you take their religion.

  25. @ yoganmahew

    2 Interest and similar income

    “Interest income in 2009 includes a credit of €597 million”

    7 Gain on redemption of capital instruments

    “€623m recorded in income statement”

    12 Income tax (income)/expense

    “Total income tax (income)/expense (322)”

    That all adds up to €1,542m?

    But hey, what do we care.

    The share price went up.

    Bank of Ireland

    Cost per share 1.358
    Current Price per Share 1.020
    Gain/(Loss) Per Share (0.338)

    % Gain/(Loss) (25)

    Gross Cost of 184,394,378 Shares 250,407,565

    Unrealised Gain/(Loss) (62,325,300)

  26. @ Greg

    in relation to the patience of the Irish.

    I reckon that typically as long as a “Paddy” has enough money for a pint at the weekend (he will adjust habits spending to ensure he does)

    then he is happy

  27. Thanks Yoganmahew & Greg,

    When I look at Income, I’m looking for repeatability and that it’s real rather than expected. My preference is to look at Interest Income as this relates to the bank’s assets. Whatever the 597m relates to, it seems like a one-off. This is a significant amount of the Total Interest Income. There is also 623m in Other Income which relates to the bond buy-back, which is also a one-off. These two items have a significant impact on the reported performance.

    On the “real rather than expected”, I’m referring to the potential inclusion of arrears interest and interest roll-up. Unfortunately AIB doesn’t provide this information.

    If I was to hazard a guess, I’d suggest the 597m also relates to the bond buyback

  28. @ TOD

    Problem solved then. Drop the price of the pint by 20% and the job’s oxo.

    On your previous question.

    “What makes you think that the share premium account is reduced following the allotment of the BoI shares?”

    February 24th, 2010 at 4:44 pm

  29. @ Ahura Mazda

    “… potential inclusion of arrears interest and interest roll-up … “

    I think arrears interest is included in interest income. The provision for impairments will take account of it.

    Contractual roll-up interest (bullet repayments on the completion of a development?) will also be included in interest income. Can’t see that it would be otherwise.

    The only question remaining is “are the provisions sufficient?”.

    I suspect no.

    From the NAMA business plan, “It is estimated that, of the total portfolio identified for potential transfer to NAMA, approximately €9 billion consists of interest rollup.”

    I have come across nothing to suggest that the practice of roll-up has changed.

    “If I was to hazard a guess, I’d suggest the 597m also relates to the bond buyback”

    Would the bonds have been the subject of a cash flow hedge?

    My money’s on NAMA and the transfer of €14.6bn of derivatives.

  30. @ Garo

    I don’t follow your comment re share premium

    as I understand it section 62 of the Companies Act, 1963 limits the uses to which monies standing to the credit of a share premium may be used

    (i) in writing off preliminary expenses, or

    (ii) the expenses arising from the allotment of the shares, or

    (iii) in providing for the premium on a share redemption

    Thus, as I understand it as bonus issue would have to come from undistributed distributable reserves

    or am I mistaken??

  31. @ TOD

    A better link.

    “I, MICHEÁL MARTIN, Minister for Enterprise, Trade and Employment, in exercise of the powers conferred on me by section 3 (amended by section 2 of the European Communities Act 2007 (No. 18 of 2007)) of the European Communities Act 1972 (No. 27 of 1972) and for the purpose of giving effect to Directive 2006/68/EC 1 of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC, as regards the formation of public limited liability companies and the maintenance and alteration of their capital , hereby make the following regulations:”

    http://www.irishstatutebook.ie/2008/en/si/0089.html

  32. @ Greg

    Yes I follow the link-however S.I. No. 89/2008 makes no reference to a change in section 62 of the 63 Act

  33. @ Greg,

    My understanding is that only the arrears interest that you expect to receive should be included (IIRC even Anglo had only modest levels of arrears interest included in their interest income). I think this should also apply to rolled-up interest (though this would have to be a qualitative assessment). IMO, interest income should be payments received not makey-up aspirations. (I understand that fair value / rolled-up interest was reasonable during the boom, but it’s not as reliable as actual income during the bust 😉 ).

    Either way, AIB should indicate what these numbers are in the Notes section.

    “Would the bonds have been the subject of a cash flow hedge?” – I don’t know how a discounted bond buyback flows through a bank’s Income statement. I suspect that the “cash flow hedge” might relate more to accounting rather than a specific protection product. I’m happy to roll back from my guess and ask what the hell is the 597m 🙂

  34. BL
    Selling the family silver is often the consequence of not understanding Micawber, as you know well.
    In depressions, only the best assets are worth selling on the open market, for the others all the economists especially Nobel winners, suggest that the state is the safest pair of hands. Thus the wealthy who trigger and time the bubbles and their bursting, gather more assets at the cheapest prices, fire sale!!

    As timne goes by the destruction of capital through government action and others belief in that action, means that future fire sales will gather even LESS!

    All
    The banks are zombies. Zombies consume humans and their capital. Dispose of the zombies and watch economic activity pick up. The BIS seem to think so.

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